7/27/2019 Trade Finance Guide 2008 for Exporters-Ch03

1/2

7/27/2019 Trade Finance Guide 2008 for Exporters-Ch03

2/2

8

political risk of the importing country. Exporters should consider getting confirmed LCsif they are concerned about the credit standing of the foreign bank or when they are oper-ating in a high risk market, where political upheaval, economic collapse, devaluation orexchange controls could put the payment at risk.

Illustrative Letter of Credit Transaction

1. The importer arranges for the issuing bank to open an LC in favor of the exporter.

2.The issuing bank transmits the LC to the nominated bank, which forwards it tothe exporter.

3.The exporter forwards the goods and documents to a freight forwarder.

4.The freight forwarder dispatches the goods and submits documents to thenominated bank.

5.The nominated bank checks documents for compliance with the LC and collectspayment from the issuing bank for the exporter.

6. The importers account at the issuing bank is debited.

7. The issuing bank releases documents to the importer to claim the goods from the carrier and to clear them at customs.

Special Letters of Credit

LCs can take many forms. When an LC is made t ransferable, the payment obligation underthe original LC can be t ransferred to one or more second beneficiaries. With a revolvingLC, the issuing bank restores the credit to its original amount each time it is drawn down. Astandby LC is not intended to serve as the means of payment for goods but can be drawn inthe event of a contractual default, including the fa ilure of an importer to pay invoices whendue. Standby LCs are often posted by exporters in favor of importers as well because they can serve as bid bonds, performance bonds, and advance payment guarantees. In addi-tion, standby LCs are often used as counter guarantees against the provision of down pay-ments and progress payments on the part of foreign buyers. A buyer may object to a sellersrequest for a standby LC for two reasons: it ties up a portion of the sellers line of credit andit is costly.

Tips for Exporters

Consult with your bank before the importer applies for an LC.

Consider whether a confirmed LC is needed.

Negotiate with the importer and agree on detailed terms to be incorporated into the LC.

Determine if all LC terms can be met within the prescribed time limits.

Ensure that all the documents are consistent with the terms and conditions of the LC.

Beware of many discrepancy opportunities that may cause non-payment or delayed payment.

U.S. Department of Commerce

International Trade Administration